Insurance for entrepreneurs - a case study

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I'm in the process of putting together an insurance plan for a young entrepreneur client of mine, and I thought I'd share it as a case study with you guys. Hopefully you'll get something out of this and realise how important a proper protection plan is.

I should also add that the insurance I do is quite different to that detailed in the Start Up Sage's previous post - "Are you wearing protection?". It refers to things such as workers comp, professional indemnity and public liability, which are all classed as "general insurance". What I deal with is risk that can happen to you personally, i.e. illness, injury, death etc, whereas general insurance covers for things like workplace incidents and stuff ups etc.

Both types of insurance are just as important in a proper protection plan!

Case study

This guy (lets call him Peter) has been running a successful business for the last couple of years. He employs a couple of staff and is lucky to have no debt. Here's what we're putting together for him:

Business expense insurance:

Although Peter's business employs a couple of staff, at this stage the profitability of the company still relies very heavily on Peter being able to work in the business. So if he's away due to injury or illness for more than 30 days, this policy will kick in an pay Peter a monthly benefit of $15,000 which covers the rent on his premises, staff wages and other fixed business expenses.

This cover will ensure that the business can survive in Peter's absence, even if the business doesn't produce any income during this time. It will help to ensure he still has a business to return to once he recovers.

Key person insurance:

If Peter suffers an injury or illness that prevents him from returning to work ever, this insurance will pay a lump sum of $100,000 which will cover the costs of hiring a new manager and the appropriate training to bring him/her up to speed. The business expense insurance will still pay a monthly benefit during the first 12 months to cover any lost revenue during this difficult period.

Income protection:

Even though Peter has sufficient insurance to replace himself in the business if he could no longer work, he can't be 100% certain that he will still be able to draw sufficient income from the business to meet his ongoing living expenses. So we've setup an income protection policy of $7,000 per month.

The income protection could have been setup to pay a benefit until Peter reaches retirement age of 65, however it was decided to reduce the benefit period to 2 years for budgetary reasons, and the fact that Peter would sell the business if 2 years passed and he still couldn't return to work.

Conclusion:

All this cover is costing Peter less than $2,000 per year, which isn't a great deal when you're running a successful business. When you consider the alternative - possibly losing your business and your quality of life - the decision is pretty much a no-brainer.

If you want to talk to me about a protection plan for your business, feel free to post a reply here (if it's a general question) or email me at shane@equita.com.au. You can also call me on 0439 869 682.

Disclaimer:

Being a financial planner, I have to give you the normal disclaimers! This advice is general in nature and does not take into account your personal needs and objectives. You should not act upon any general advice without first seeking the personal advice of a qualified professional.